Technology and futures exchanges

Wired

The costs and benefits of technological advance in futures trading

PHOTOGRAPHERS and visitors love the hand-waving, shouting and colour in the “open outcry” pits of Chicago's futures exchanges. Even in the new world of online trading, though, there is character—in the shape, for example, of Harris Brumfield. Once a Mississippi catfish farmer, Mr Brumfield became a trader, made a fortune, and is now head of Trading Technologies, a provider of trading software, in which he has a controlling stake. He claims that his company's order-entry platform handles more than half the electronic volume on the world's big four futures exchanges—the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), Eurex and Liffe.

Futures trading is booming, and technology plays an increasing role in its success. Eurex, the top exchange in Europe, launched a fully electronic subsidiary in America this year, though with disappointing results so far. The CBOT, concerned that its prized Treasury contracts were under threat, fired back with improved technology of its own, reduced transaction costs and a new common clearing link with the CME. The CME this week announced the billionth trade on its Globex electronic trading platform. In the third quarter, electronic trading was 61% of total volume, up from 52% in the second.

Independent technology firms are both driving and benefiting from this growth. Besides Trading Technologies, which expects revenues to be about 60% higher this year than in 2003, GL Trade, Realtime Systems, FFastfill and EasyScreen are among those with well-regarded products.

But technological advance is not always smooth. One topic at a big annual industry conference in Chicago next week will be how well electronic order-routing and trade-matching systems are coping with rapid growth. With more futures products coming online, computer servers are taxed by added traffic. More complex strategies take longer to calculate and match with corresponding trades. There is grumbling about delays. David Norman, of the Illinois Institute of Technology, contends the bottlenecks are getting worse. “The systems can't handle this volume of data,” contends Mr Norman. “It's a finite situation and it's going to break.”

Some end-users, such as big banks, blame the software. The software firms retort that if users want speed, they must keep their own networks upgraded: 90% of Trading Technologies' front-end trading software sits on customers' networks and only 10% on its own. Big brokerages use several internet service providers to ensure speedy trading.

The exchanges may be booming now, but Mr Norman predicts that over-the-counter markets, which cut out the exchange as middleman, will flourish at their expense. And the same technology that has been driving the exchanges' growth has given more power to their customers, who can now trade products on more than one exchange. Multi-exchange trading platforms are in great demand.

Yet Mr Brumfield (whose firm is embroiled in a patent dispute over business processes) sounds a little nostalgic for his former days in the open outcry pits. “I loved the floor,” he drawls: “the camaraderie, the competition, the pushin' and shovin'.” Not even the best technology can replicate that.